Richardson Electronics, Ltd. Q2 FY2026 earnings call

Management Statement and Operational Highlights:

• Richardson Electronics has achieved 6 consecutive quarters of year-over-year growth, driven by repositioning toward higher growth end markets and expanding engineered solutions. The strength of the team is a key factor.
• GES grew 39% year-over-year and 14% quarter-over-quarter, with growth in power management products and expansion into Europe and Asia. PMT saw sales decline but had growth in RF and Wireless Components. Canvys had 28.1% revenue growth.
• The company remains focused on managing expenses, improving inventory turns, and has a strong cash position at $33.1 million. There are new product launches, partnerships, and initiatives like a battery energy storage design center and an enterprise-wide AI steering committee.
• Transition from the health care business is ongoing, with completion of ALTA tube production expected in Q3 FY '26 and repair of Siemens tubes progressing, anticipating profitability in FY '27.

Segment Performance:

• Green Energy Solutions (GES): Sales were $8.3 million in Q2 FY '26, a 39% increase compared to the prior year and a 14% increase from Q1 FY '26. This growth is driven by the adoption of Pitch Energy Modules for wind turbines and other power management products globally.
• Canvys: Reported revenues of $8.8 million in Q2 FY '26, an increase of 28.1% from the same quarter the prior year. Gross margin as a percentage of net sales increased to 32.6% from 31.7% in the prior year's Q2. Backlog at the end of Q2 FY '26 was $38.0 million.
• Power & Microwave Technologies (PMT): Sales were $35.2 million in Q2 FY '26, a 4% decrease compared to the prior year. This reflects a slowdown in the electronic device MRO business, offset by growth in the RF and Wireless Components business unit. Excluding health care, PMT sales were approximately flat.

Guidance:

• Continued growth expected in GES, Canvys, and semi fab equipment markets. Anticipation of improvement in health care transition with profitability expected to start in Q1 FY '27.
• Plans to invest cash in growth initiatives such as expanding the Sweetwater design center, global expansion of products, and exploring small acquisitions. Expectation of stronger demand in Q3 and Q4 for semi fab equipment.
• Confidence in driving revenue and profitability through organic initiatives and disciplined acquisitions, leveraging existing capabilities and global infrastructure.

Risks:

• Uncertainty associated with tariffs and market conditions impacting PMT and GES.
• Volatility in inventory forecasting, particularly for semiconductor demand.
• Challenges in accurately forecasting customer demand for Green Energy products, leading to potential mismatches between demand and inventory.

Q: You mentioned how overall GES backlog declined, but that core backlog grew. Could you just discuss what would be considered core backlog versus noncore?

A: Sure, Bobby. This is Greg. So the backlog -- so sales were up 39% and backlog was down $57,000. That's not too bad. You grow 39% your backlog only decreases $57,000. So when I talk about core backlog, we have the products that you and I have talked about, the Pitch Energy Modules and everything else. We also have a group of customers that are -- we're selling components into that are building Green Energy products. It's a much smaller portion of GES, but that's what we call the noncore and that book-to-bill was down. But if you look at the core business, which is 95% of it, the book-to-bill was 1.10 on 39% growth and of course, 15% above that. So we're very excited about the business -- core business that we talked to you about that you know about. Those are the products that are growing.

Q: So I'm just curious with the GE approval list for the [ ULTRA1000 ], where do you -- and what kind of opportunity could that present?

A: So Anja, we have GE approval. We're the featured product on their Internet site or their marketplace product. What -- we're not driving this. This is being driven by their customers. So NextEra and Invenergy has been pushing GE because they have a handful of sites where they're using GE services to do maintenance and service. And so all we need to do is have GE. We're going to send them some product, and they're going to try to literally blow it up. I mean it's all about what this product will do so they can improve it from a safety point of view. From a performance point of view and working in their turbines, that's already been approved, that's already done. So we've been going back and forth with an NDA. I've worked for a $30 billion big company -- for the $30 billion company before, and it just -- it takes time. So we have an agreed NDA. We signed it. We sent it back to them. We're expecting it back. But I will tell you, Anja, these people aren't waiting. In fact, we booked a large number of business that they said, you know what, will outsource this ourselves. We won't use GE services to install these Ultra3000s, which we've been buying for other sites for 3 or 4 years. So it really right now, I don't see it being a slowdown of any sort. We have more than enough business right now. It will be an upside. But I wouldn't doubt if they just say, you know what, we're not going to use your services to do our Pitch Energy Modules because these things are such a cost savings to these owner operators and they eliminate a huge problem that they have, I don't think they're going to wait for this. So this is being driven by GE's customers. We're just supporting it. But again, we finally have an agreed NDA because I'm not sending them any product without an NDA. We're going to send them products here this quarter, they'll test them, and then they'll say, okay, their service group can install these into the turbines. But it's interesting, some of these owner operators aren't waiting for them. They're just doing it themselves and installing it themselves or outsourcing it.

Q: And then what's kind of margin impact does the medical have. What kind of opportunity do you see there as you conclude that supply agreement?

A: Okay. So this is Wendy. Year-to-date, the overall hit to the gross margin in PMT has been almost negligible. It's about a 0% gross margin, so we're not experiencing a huge hit there. It's the addition of the SG&A. And on a year-to-date basis, while we're doing better than we anticipated with that, we still are losing money. As we mentioned in the call, we anticipate finishing up the ALTA tube production in the third quarter. And when we conclude that, and we're focusing then strictly on the repair of the Siemens tubes. We expect that to turn to a profitable bottom line contribution. So I'm estimating, we're estimating at this point that, that will begin in Q1 of FY '27, but we're going to do everything we can to pull that into Q4.

Q: And then you're sitting on some cash, and we expect cash flow to improve as you are finishing building up the inventory for the powergrid tubes. What do you plan to do with all the cash?

A: Well, I'll jump in first and then Ed and Bob can also contribute. The first thing we always remind everybody, Anja, the cash is spread out throughout the world. And I believe today, about 70% of it sits outside the United States in various legal entities. And that cash has to stay there. So while it looks like -- I mean, $33 million is a great number, and we're going to continue to focus on growing that. Please do remember that some of that is not in the United States. So we're going to continue investing in the growth initiatives primarily in the alternative or green energy solutions part of the business. We -- Greg mentioned the Sweetwater, Texas facility and improving our new product development cycle. We're looking at some additional both sales and engineering resources that support that business. So we really want to hold that money that we have in the United States for those type of investments. We are continuing to be very opportunistic and open-minded about small acquisitions. Those would be ones that would be easily bolted on. Again, focused primarily in alternative or power management and focused in areas where they bring in engineering or some type of product that is unique or exclusive to the market. So those are the areas where we're really holding our cash. Ed and Bob may want to add to that.

Q: I want to follow up on the semi question that was just asked. I mean it seems memory has gone from dead on arrival to the hottest thing out there. I know you've not exclusively memory on your both sides. But has there been a cadence shift with what your customers have talked about. I know last quarter, Ed said you would finally kind of work through kind of end customer inventory. Can you just give us a little bit more visibility on perhaps a cyclical recovery there? It seems you're still a little low from a revenue and earnings point of view, but historically a large contributor for the company. So kind of when you say there's a better outlook, is it inflected positively? Or are you still hoping it will inflect positively? A little more color on that would be great.

A: So I'll start on that, [ Chip ]. So as I mentioned, we're starting to see stronger forecast for our Q3 and Q4. Bear in mind that the forecasting is not always the best and it tends to bounce around a lot as we've been discussing really for the last couple of years. But we do see, again, across multiple customers within that channel their input to us is get ready. We are ready. We have the resources. We have the space. It's not going to cost us a lot of money in terms of realizing upside. I also want to point out that on a year-to-date basis, Q1, Q2, we're still up considerably over prior year's first 2 quarters. So we are cautiously to more than cautiously optimistic about Q3 and Q4, and we're ready. So I don't know if that answers your question, maybe you could follow up if you have anything more you want to know.

Q: Could we maybe just discuss the growth initiatives that you guys launched a couple of quarters ago and kind of how those are progressing in a little bit more detail? Just curious to hear more on that.

A: I can talk a little bit about the PMG and the PMT and GES business. So as you know, Bobby, the growth initiatives were: one, to expand internationally, the product; two, implement our energy storage system program and continue to add new products. And all of those were successful in the past 2 quarters. So on the global expansion, as I think we've talked about, we now have orders and have shipped orders into Asia and Europe. We are coming out 3 new product -- I'm sorry, 2 new products in Q2 from our new Sweetwater design center that are already in beta testing with a couple of very large owner operators. So we'll introduce those and we fully expect to start receiving bookings for that. And on the ESS side, we rolled it out. We have technology partners. And in December, we booked our first order for energy storage system with the town or the city or city of Goleta, California for their water waste treatment facility. We will also be supplying the solar panels for that and the energy storage system. Through that process, it kind of confirmed that our niche approach going after utility and small -- comparatively small, very large to us, 2-megawatt type systems. That was booked in December. And we have a list of other ones that we're pursuing in quoting. These quotes are 10 to 15 pages a piece. But we're still very excited about our strategy in terms of technology partners that component business grew. Our Engineered Solutions business grew. We've added new products. And then the BES thing as we grow it, we really feel strongly, especially for the State of Illinois, once that demo center is in place and people can see it. See how it works and see we would train them and educate them on how to get all these rebates that the State of Illinois gives the best in the nation, even better than California. So those are our main initiatives, and we have traction.

Q: A couple of quick questions. One, with regard to the semi-cap equipment space, have you guys built prebuilt product for that, it's something on your work in progress or your finished goods inventory line there that you've been -- because you've been preparing for this for some time. It seems that they have been a little slow getting the pull-through.

A: Ross, yes, we do that where we can. I think we've described the business before as being very high mix, low volume. So it's not the type -- it's not like the ULTRA PEMs or the ULTRA3000s where we can build them. It's all the same products. So we don't have the kind of inventory that maybe you envision of having thousands on the shelf ready to go. But we have good exposure and good track record in terms of what the demand is. And we are certainly doing everything we can to make sure that when those orders come in, they go out almost instantaneously. So little bit of a mixed answer there for you.

Q: Can you talk about -- give more color on the battery storage opportunities? And what kind of magnitude, what kind of time line are we looking at in that space because it's a fairly -- I mean, it seems to be a very important area we're seeing, whether it's AI data centers or quite honestly, just even factors or others given the nature of the grid.

A: So Greg, just dropped off, Ross, that would be an area for him to address. But what we can tell you is that his list of opportunities continues to grow. They range right now in size, magnitude anywhere between maybe $0.5 million on the small end to a couple of million or more on the large end. He is focused and the team is focused heavily in the industrial and commercial market, more of the let's look at it as kind of Tier 2, not the data AI centers per se. Those might be a little bit bigger than what we're planning to build. But it's an area where we've seen a lot of strong interest particularly in the states that Greg mentioned where the states are still providing a lot of incentives. But I don't think anybody can pick up anything and read anything without seeing the growth in energy storage requirements. So we fully plan to take advantage of that. And we'll try to bring some more color to that in the next call.

Q: I realize Greg has dropped off the line, but I'm hoping somebody can provide some level of update on the electric locomotive product lines and the manufactured diamond product lines.

A: All right. I'll start with that. So let's take the latter one first on the diamond. What we've seen there in that market, and I think again, everybody has read about is that, that market became very quickly saturated, oversaturated the synthetic diamond market. And as a result of that, we've seen a slowdown in the demand for those magnetrons that are used in the equipment that manufactures the diamond. When Greg referred earlier to some of the other elements of Green Energy Solution being down, that's one of them. So in that area, it's still out there. We're still selling them. It's just again, an overcapacity of equipment already on the market and certainly an overcapacity of the synthetic diamonds. All right, in terms of the EV rail market, I think Progress Rail recently put out some of its own press that they have recently shipped 2 of the large trains to Australia. So we're pleased to see that. You may recall in FY '23, we shipped a significant amount of batteries that are used in those trains. So we're going to sit back on the sidelines and see how those 2 trains perform in Australia and what that means for the future. On a more steady cadence basis, as I just referred to in my answer to Ross Taylor, is that we are now shipping on a regular run rate, the starter modules, and we expect to see some upside there. So in general, I would say that the EV rail market certainly is favoring more of a hybrid approach. This is outside of Richardson. This is the general market. More of a hybrid approach, but our starter modules, they are used in any train, whether it's diesel, electric or hybrid. So we remain optimistic about growth in that segment of the business as well.